Ichigo Group Holdings Co

Everybody, thanks so much for joining. I'm Scott Callen, chairman of Ichigo. I'm joined by Dan Morisaku, who is a senior member of finance team and the head of global IR for us. We are doing something brand new. We just did a Japanese earnings call. We were wearing our suit and our tie for the global call. We decided we think to join the globe in recognizing how incredibly hot it is ever in the world right now. So, forgive us if that's okay. We've gone casual very quick, the fact that we're in the middle of July. So, I'm talking off of what's in front of you, which is FY272, the February 2027 Q1 corporate presentation. Let's jump into it.

We've got a slightly different format today.

We tried to simplify it. Hopefully, that's helpful for you. If you have any feedback, we of course welcome it. So please feel free to come back to us on it. So the summary is, look, we're off to a strong start. It's not surprising. The real estate market continues to be very strong. The Japanese market, real estate market for decades has had a compelling advantage of being very low cost of financing, low interest rates. but with no inflation and therefore no ability to raise rents. And so it's changed in the most profound and powerful ways that rents are going up. And so it's made real estate a more attractive asset class. And it's flowing through in our business both because we have a balance sheet in which the value of assets is going up and second because what's driving this is inflation, construction inflation in particular. And as you know, our business model, which is value-add, is very durable with respect to inflation. We spend very little amount of money on CapEx, and so we are advantaged in the operating environment. And to the extent this is secular, that we have inflation in Japan, we're going to be advantaged on a permanent basis. So business profit is up 45% year-on-year, net income up 24%, EPS up 32%. Of course, EPS is growing faster than net income because we think our shares are extraordinarily cheap. trading sub 10 times PE, something like 7.4 times cash PE. They're as compelling as they've ever been. We've bought about 10% of our shares, more than 10% of our shares outstanding in the last two years. We think the shares are a compelling value for all of our shareholders, and we're putting our money where our mouth is. Cash APS is up 70% year-on-year. Stock Earnings says increase in integral owner's assets, which is true, but the whole point is stock earnings are relatively stable, so they're not going to move around very much, go up a tiny bit. Earnings go up a bunch on sales of value-added retail assets. And the real estate subsidiary, which is primarily office and residential assets. Highlights are we're trying to, and I'll talk about this later, continue to innovate on behalf of our tenants and therefore for our investors, because ultimately the value of of a real estate asset is his ability to serve tenants well and our investors and our shareholders by serving our tenants. So we're doing some stuff with respect to innovating in the office space. We continue to innovate in the hotel space with our hotel brand, The Knot, and we completed a $10 billion share buyback, as I said earlier. The bottom of the page shows the four-year forecast. We're well on track to meeting it and beating it. Just touched on the key issues there. You should see we're on track for record profits this year again. And we think this is secular. I mean, I think it's our job to have record profits every year. We have your funds as shareholders. We should be deploying those funds in a more powerful way on a consistent basis year after year. So we're on track for another year of record profits. And, again, I expect that will continue. Cash earnings are more than two times accounting earnings because we focus on long-term cash flows. This is not a company that is super focused on doing anything on the accounting side that does not have powerful value for shareholders, and we think it's ultimately rooted in generating cash flows for shareholders. There's a bunch of material that I'll go through relatively quickly, and it's meant to give you transparency on how we're running the business, and this will be an example of it. You can see you have a diversified portfolio. The record forecast for this year in business profit has got a number of drivers to it, the most important being SRE, so Sustainable Real Estate Business, and agency loaners. I labeled this, for the first time, we called the section KPIs. It's meant to give you some sense of key performance indicators, not in a narrow sense, but in a broad sense, and the things that we focus on to deliver enduring value for you as shareholders. One of them is structural profitability, so a KPI there is we want our stock earnings to be well above our fixed expenses to make us structurally profitable, and we are. So currently running at about 200%, 196%. is the kind of the relative fixed earnings, which is stock relative to fixed expenses. You can see on the right side, on the upper pie graph, you can see that, I did a pie circle, you can see that it's the stock earnings are relatively diversified, and you can also see in Q1 that almost all the flow earnings came out of a sustainable real estate business, and that will change during the course of this year. Stock earnings, so another element of the business is you want to have both stock and flow. The stock earnings is contractual. The flow is also very durable. You can have a business like a convenience store or a supermarket and it's all flow earnings, but every day you're creating value for your customers and they're coming to the stores. And so by no means is this situation where the stock earnings are really valuable and the flow earnings are, you know, should have a low multiple on them. The source of our flow earnings, that we add value to assets in a systematic way and generate value for tenants and therefore generate value for investors and owners of those assets when we on-sell them. We have diversity and that's another element of our business. We have a portfolio of businesses and it moves around a little bit. It gives us broader diversification. I have to tell you, though, we're not a real estate conglomerate. There's a core element in everything that we do, which is value-add, and we express that value-add through a number of different asset classes and business models. We have a very strong financial position that expresses itself in a way, and we work to achieve that, that expresses itself both in us wanting to have overwhelming long-term loans, and they're currently, and systematically over time, we manage to be about 90% of our loans being long-term, and also we reduce interest rate risk by hedging our loans. So currently fixed rate loans are about 56% of the portfolio, a weighted average interest rate of 1.53%. So you can see the interest rate has gone up substantially over the last couple of years, which is to say it's gone off of an incredible low basis from 100 basis points to 153 basis points. by given that inflation is running at three and construction inflation is running between five and 10%. This is still extraordinarily low cost funding in order to take advantage of the market opportunity that is in front of us. Again, we're trying to provide some perspective on the drivers of the business and how they express themselves. This is what the full year forecast looks like. The sustainable real estate business continues to be our major driver. We have significant contributions from our owners, and from the hotel elements of the business, we'd like to grow clean energy and asset management more. On the right side, you can see the assets. About half of our assets are owned and on balance sheet, overwhelmingly real estate, and you can see on the bottom of the page, asset management also has a substantial number of assets that we invest and manage on behalf of our investor clients. In terms of acquisition and sale activity, net acquisitions in the first quarter, that is not what the year is going to look like. And to be clear, in a sense, the acquisitions of 34 billion yen kind of overestimate the actual acquisition activity, which is to say, issued owners were taking in assets that we had agreed with the developer to buy generally kind of 18 to 24 months ago. So those are not new person's activity. In the office space, most of this is coming on, and I'll talk about it, the brand new, the Village Sapporo asset, which is a couple years old soon. In terms of actually brand new acquisition activity, it's on the order of something that looks really like $3 billion, like tiny. And we expect this year to take down the balance sheet. I've been saying this for a while. We've had stuff coming in. So the balance sheet has been growing, and the balance sheet is going down, folks. It's getting smaller. It reflects our view that we want to manage the balance sheet. We want to be capital efficient. There's a lot of risk out in the world right now that continues to be a phenomenal seller's market. We have ongoing capabilities and value add that we can express in highly capital efficient ways. We don't need this size of balance sheet, so the balance sheet is going down. So anyway, for the first quarter, we added some balance sheet growth, but that will change from the second quarter onward. This is what the timeframe, this is what acquisitions and sales look like over time. Been some balance sheet growth, but relatively balanced. But we're going to take it down. From here on, And again, I'll order a magnitude. It's not as if we're going to have the balance sheet in the next kind of 18 months. It continues to be very productive. Business is productive, but the balance sheet shrinkage is going to occur. So to go into the segment earnings, again, we have a portfolio, and it moves around quite a bit. You can see Asset management is down quite a bit. Hotel is down. Sustainable real estate is up a ton. Clean energy is up a bit. That results in a totality of being up 45% in terms of business profit in the first quarter. Sorry, I jumped ahead. So on SRE, Sustainable Real Estate, so this is a business where we buy assets and improve them. It's overwhelmingly focused on office and retail, although we've had some increased activity in logistics. Not a lot happening on the stock side. This is stable earnings. The balance sheet is not moving around, so you wouldn't expect it to be moving that much. I think the most important thing to point out is we continue to do very, very well. and the leasing activity with our biggest asset, which is traded via Odaiba. As you know, that is currently in the sale process. We would expect to generate some substantial returns on gains on sale this year. The floor earnings up a ton. And look, this is a quarter to quarter, and so we did less in Q1 last year. We did more in Q1 this year, but we sold an asset in Fukuoka. that we did very well on, and we sold a real estate subsidiary that we also did very well in terms of our activity, which is primarily, as I said earlier, residential and office. We continue to seek to innovate on behalf of tenants. And so one of kind of I We think it's an insight, but we prefer to think of the world in terms of hypotheses. Don't have a view. Have a hypothesis. Test it against the reality and evidence as it emerges. If it disproves your hypothesis, then adjust your hypothesis. And so one of the thoughts that we have is that WeWork, and this goes back over time, was genuinely a breakthrough in high aesthetic office and in creating communities. But WeWork is shared offices. and you know most of the world is not working in shared offices when the office environment they're in private offices and yet there was something very valuable we think in having an actual community and so the village is our is our office offer that is community-based and so literally it's called a village in Japan. The words we use are in Japanese, but there's a village mayor in each building who is an Ichigo employee who works to support the needs of the village members who are tenants. And we have these offices that have genuine communities in them. And we think that's something that's valuable. We have a hypothesis that all of us yearn for a community. I'm pretty sure a lot of you who are listening to this are in offices where you go up and down elevators and you don't know anybody, and you don't talk to anybody. You don't want them to talk to you, perhaps. I don't know. But for folks who want to have a genuine community in their office, this is something that we are providing. We think, again, we think the insight plus hypothesis is You know, communities are not just for shared offices. They're actually for private offices. So to have a community, of course, you need to have shared spaces. So you have shared lounges. You have shared entrance areas. You have cafes. You have all these things where the community gets together and we do events. You know, Meet the Neighbors is what we're calling these events in which we're doing together. And so that's the general framework for the village kind of offer. Specifically in the Sotaka office, we renovated an existing office, which we had bought from a single tenant. It was a corporate tenant, which is using the building for itself. They moved out, so the entire building became empty, and we actually set it up entirely as ready-to-move-in offices. And the concept there is everything is pre-fitted, so the tenant doesn't have to worry about kind of anything, move-in costs, and move-out costs, which are enormous expenses in Japan. They don't have to figure out about trying to get contractors and run contractors in a very difficult environment in terms of getting contract help. We do it all for them. We provide this for them, and you get a rent output for it because you're creating value. So the leasing is going on at about a 70% premium to what a classic, you have to pay for everything yourself and do everything yourself and don't have the flexibility. and so this is a very powerful offer. So it's not just in the case of Village Osaka. It's not just a community offer. It's also a ready-to-move-in office offer for the entire building. We also opened up the Village Sapporo this year. In this case, we work in the first floor. It is the first we work in Hokkaido. So Sapporo, of course, is in the northern island of Hokkaido. working with them to develop a community throughout the entire building itself. But this is again focused on not just having a cold slab of steel and glass but an actual genuine community within the building that can interact with each other and support each other and be human beings and community participants together. Hotel business is down the first quarter. We expect the full year to be up. The knot, which is, this is our, that's our boutique hotel offer. And, again, the inside slash hypothesis there was that, and we're now, we have six knots, and we'll talk about it a little bit later. We're working on our seventh one. The idea was, you know, Japan has super high class hotels that are really expensive, just like everyone in the world. They have all these budget hotels. It wasn't something in the category of kind of $100, $200 per night. that was really, that was nice. And so we thought there was a gap that could be filled. The Nats all share a common characteristic of being very local and also having, Japanese care about this and people coming to Japan care about this, having outstanding restaurants so you can go there and eat super, super well and also see them. And so these are really, and we'll talk a little bit later, but the Nats, Tokyo and Hiroshima are doing very well. We launched, and I'll talk about this later, NOS in Sonomia and Fukuoka.

We're going to full your contribution and things like that.

As you know that we're incorporating, we have incorporated no full earnings in our forecast for this year for hotels. We don't expect to sell any hotels with that changes, and we'll, of course, we'll get some upside there.

RevPAR is down about 10%.

It's actually not, we think, the kind of Iran war, the sort of charges and all that sort of thing. This is showing up primarily in decreased Chinese arrivals. There still are tensions between Japan and China. Chinese arrivals were just released a few minutes ago, down 50% year-on-year, over 50% year-on-year, and also some slowdown associated to the ending of the demand for the Osaka Expo. And so we're seeing, particularly we're seeing Osaka and Kyoto being down about 20% year-on-year. Tokyo and Hiroshima, both not doing well, are up 10%, but when you put it all together, you have about a 10% drop in REFRA. These are the two, the nots that we just launched, I spoke to both of them already. Again, it is really more about the taking existing assets, improving their aesthetics, the food, the culture of the building, if I can put that, and incorporating them in the community, you know, making far better functionality, bringing them to kind of best in class across both the hard and soft elements of functionality and customer and, I guess, comfort. So we've got six now. We're working on the seventh, which is in Osaka. and this is, the economics are proving to be very, very powerful and this is why we want to do more in this space. Each of the owners did very little in the quarter. It looks like their floor earnings are up a ton. They are because this is basically a one-year turnover business and so you sell the assets and they get new ones and so the fact that we held off on some each of the owners' sales last year and they're going to happen this year, meant that our stock earnings, so there's a rental income off these assets, went up a whole bunch. But owner's activity is going to accelerate from the second quarter. And at the heart, owners is about serving and tenants. So it is what we call a fabless model, meaning we do the design, but the development and construction is done by outsourced developers. So it has super high capital efficiency. we've gotten to be really, really good at understanding, and the target market is prime residential areas in Tokyo, understanding what the requirements are. We have developers build to our specifications. We lease them up, and then we turn over in about a year these fully leased up assets in great locations to investors, and the investors run the gamut from Cash Rich Individuals and Corporations which was the original concept and it's turned out that this has become a very institutional market where we do a lot of bulk activity into big institutional investors who want access to this very durable and high return and with now presidential rents going up increasingly higher return asset type. As you know we've been selling this all to security token space so this is but the whole point is if you're going to make great investment products in real estate, because that is one goal. We need to serve the investors who are buying these assets. The first thing you need to do is you need to tenaciously serve tenants. You need to have the best assets for tenants, and then it gives you the opportunity to have the best assets for investors. As a management, business profit is down 51% year on year. Actually, we know at this point that Florida's were down I need to present because bad with large floor earnings on performance fees on asset sales In both issue office REIT and then they had some some some fees off of the off of prior funds last year, but but the the We actually now know that there's been some read activity and and by a bit by our REITs our listed REITs and so there will be form schemes coming in and So we now know we're going to – based on – we never put into our flow earning forecast anything because these are decisions being made by the REITs, not by us. But we now know that this activity has occurred. We will be getting the fees, and so we will come in – I think it's going to be something like plus a billion yen on cash earnings at this point and plus kind of 0.7 billion yen on business profits. So we're actually closing in on last year at this point, and we may actually go above it. So these numbers are getting better, and we already have visibility on that. And we have a portfolio, as I said earlier, both kind of asset classes and kind of vehicles. So they run the gamut from listed REITs to private REITs to private funds and our digital token business. Energy is is up 15% not not a lot happened in terms of portfolio stock earnings were up and that drives business profit up 15% but this is a business that has not grown to my frustration and to our generalized frustration and and and you know we have spent some time reflecting on that what we need to do and we try to be you know savvy and not take an appropriate risk in a pretty Dramatically changing operating environment with the end of the fifth is a feed-in tariff structure that gave enormous Structural stability to earnings to kind of a fairly dramatic changing environment and and we don't strap on Risk on and these are kind of heavy upfront investments without kind of having high visibility on future earnings It's one of the strengths of real estate as you know, you have you have visibility on earnings It is one of the strengths of our clean energy business. We might have that also So the one area that we made a new commitment on that we think qualifies is we have a battery storage business that was just launched that has, you know, pretty powerful economics. We're now, we think they're kind of NOI 13, 14%, something like that. And so this is an area that we are beginning to grow and will be a growth driver in this business. I'll just touch briefly on shareholder returns. As I said earlier, we bought back over the last few years over 10% of our shares. I think they're a compelling value, and this has been good and accretive for our shareholders. We have also moved on the dividend. We took the dividend up 35% this year, raising our DOE dividend on equity ratio from 4% to 5%. On the sustainability side, global warming is real. It is a fundamental element of our business to address that. We are climate positive. Our CO2 reduction efforts are 9x our CO2 emissions. We are 100% renewable electricity across all of our operations, so we've achieved the RE100. We are a double A-list company, one of the very few. They're only less than 1% of companies in the world that qualify for that, both climate change and water security. and being sustainable as a company is fundamentally important to us and to all of our stakeholders. At this point, no questions. And so we're going to bring this to a close after another pause, which is hopefully – oh, there's a question. Okay. So this is why we needed to wait.

Can you hear me?

Yeah. Thank you, Rex.

Yes. Hi, Scott. Thanks for your time. One quick question I have is you mentioned on the – the battery business the stationary storage battery business the expansion seems to be mostly after 2031 obviously as you understand in Japan it's become a bit more of a priority why not be bigger sooner like 2029 onward as opposed to 14 billion after 2031 oh just to be clear and we've probably written that before that secondary pipeline is 29 to 31 pipeline

So it's in an earlier process of due diligence to determine its economics and attractiveness. So that is 2029 to 2031.

Understood. And another quick question I would have is regarding the TFE free float, obviously you guys have been buying back shares as you pointed out, which means you are getting pretty close to the, I don't know if you're aware of the borderline Limit for Free Float Adjusted Market Cap, the TSE guidelines. You're all about that, but, you know, things can change. What are you guys thinking about on that front?

So, we still have room to buy back shares. So, the free... Do you know what our exact free flow number is right now? I mean, we need to have at least a 35% free flow. I think we're probably at, like, 45 or high 40s or something like that.

Yeah, but the way the TLC calculates is actually different. So maybe I would suggest you get in touch with them because from their rules, you are getting closer to your free foot weight is 25% for them.

So we are familiar with the rules. It's just that Scott Callen doesn't have the exact number for me.

Okay. Is that it?

Okay. So, Greg, the answer is we're currently at 60, and so we have 5% more that we could own before we touched it.

Understood. But then that means that you have a market cap problem in the sense that, you know, if you are giddy-giddy on the free float and then your market cap falls, then you are at risk again on the VTSA rules, is my understanding.

yes and but the market cap level is super low so that's not the issue so we need to manage to we need to manage to the free float rule and so our thinking on this one is we think the shares are very cheap they're certainly viable and we have room to buy more but at some point we may have to shift towards bumping the dividend up a bunch and we'll do that too so so to the extent that the business doesn't require capital, then we pay it out. And so we have chosen, in the past, we've chosen to bump our dividend, but we've been very focused on using the buyback tool to shareholders, and if necessary, we're going to shift the dividend. I'm perfectly willing to do that. I mean, this business is super productive. We can increase the dividend very substantially without any problem at all. And so the choice to have kept the dividend relatively low and to use buybacks is because we think the shares are super, super cheap. So we may end up in a world where we think the shares are super, super cheap, and we restrict them on buybacks, and so we'll just raise the dividend a whole bunch and see what happens to the shares.

and so if I may with the last question Scott so you mentioned that you might start to shrink the balance sheet a little bit from Q2 but then you're also going to have maybe a big lump of cash coming if the ODAI by building cell closes so you're going to have a lot of cash yes ok a lot more cash than usual I would say yeah ok that's correct

Yeah, that's what happens. You use cash in order to build out kind of your balance sheet. And when you shrink your balance sheet, the kind of cash comes flying back at you. Absolutely. You're right on that, Craig, as always.

No, I'm just saying because I think when we spoke maybe a couple of quarters ago, the impression was that even if you sell the other buildings, then you must be able to invest, reinvest, you know, a good chunk of that money. I get the impression that the tone has changed a little bit at the margin base.

Yeah, I mean, maybe. I mean, which is to say, real estate prices have continued to go up. Global operating environment is riskier than it was a year ago in terms of the things that are going on. But I don't know that we've changed that much. I mean, we... We try to be as capital efficient as possible and distribute any cash that is not necessary in some way or form back to our shoulders. And the business is very cash productive. So we did spend a couple years, and I'm going back a little bit further than a year ago, Greg, where we saw inflation coming. And again, this market I touched upon earlier, People in Japan are relatively unfamiliar with the idea that real estate prices go up every year because of inflation. And the reason inflation drives higher real estate prices is because new supply has to come in at much higher prices because of inflation. And so it either cannot economically come in, so new supply is restricted, or it comes in at higher prices and gives you the ability, if you have existing assets, to raise rents because that's what prices are. And so, you know, I'm American. You know, this is something that is kind of classic. element of real estate all over the world except for Japan. So when we saw this surge in construction costs and took, again, a hypothesis, and we thought it was an insight plus a hypothesis that it was going to have some durability because it's linked to a fundamental shortage of construction talent as the number of construction workers in Japan decreases because of aging out of the population, we thought this would be a potential driver of higher real estate prices, via higher real estate inflation and therefore we increase the balance sheet in anticipation of this. And so now is the time we think to monetize that and we're going to start shrinking the balance sheet. And cash will be then written. Yes. Absolutely.

I'm sorry. One follow-up if I may. One last one. Sure. Please. So on the forecast for sustainable real estate, for this year, 18.5 million. I assume a lot of that year-over-year increase is Udaiba. And I assume, as usual, you're conservative in forecasting this.

Yes. I'm going to say we always have, you know, with low income, two things we're doing as a management team. One is we want to make sure we have multiple paths to achieving the targets. And two, you want to get some flexibility on Okay, we, you know, so in other words, if you sell, you know, these three assets, you'll hit your target. And so instead we'll sell, we'll try to sell 12 assets. And it's all because it's also about, you know, you have never assets that are available to be sold. They're going to be kind of idiosyncratic or asset specific or buyer specific situations where there's a better price for one, you know, and sometimes an astonishing better price. So both in order to maximize profitability for our shareholders and also to kind of hit our targets. You know, we always have kind of overmodeled and have extra activity around hitting the targets. So, yes, the numbers are conserved.

And because you've disclosed this in your forecast, to the extent you can answer, I guess, because this is a very large asset compared to your total asset.

Yes. It's about 10% of our total assets. It's a big asset. Yeah.

So in terms of kind of insider rules, you've already disclosed that to the market, so it doesn't prevent you from announcing buyback during the year to the extent you can answer.

Yeah, I mean...

We don't know. Okay.

I mean, I think the way that the legal issue around this is that we're allowed to talk about kind of activity, and we've been transparent about it. If we're actually in contract or something like that, and I think it's fine to say that we're currently not in contract, then that would kind of prohibit activity on our part. I see. Okay. But, yeah, I mean, at some point, if a contract is extended, we'll be restricting on buybacks. Yes, that's the way it works. You're absolutely right.

Okay, great. Thank you very much, Scott.

Thank you. I think we may be done. All right. Thank you, everybody. Have a good day. We're grateful for the opportunity to work for all of you. Thanks. Bye-bye.